Who is Elga Bartsch?

Apart from the fact that she is German, aged 37, and works for Morgan Stanley, perhaps, until recently, little more of any importance would have been known about her. But you try a ‘search news’ click on Google, and you will see how many times the name of ‘our Elga’ shows up in connection with what we might choose to call the ‘German disease’. (In reality the German economy has expanded by an average of only 1.2 percent every year since 1992, which is the same as the Japanese one – and less than half the growth achieved in the U.S. and the U.K. over the same period – so why don’t we say Germano-Japanese disease? This might help us get a bit nearer to the underlying causes). The reason for this: Elga is fast becoming the best known champion of the view that the key problem facing the Germany economy is the high cost of German labour.

“The reason that we go more to India and those countries is we get highly skilled young people in a flexible labor market for cheap prices,” said Henning Kagermann, 56, chief executive officer of SAP, in an interview at the Cebit fair in Hanover, Germany. “This is highly competitive against our home market.”

In fact the Cologne-based IW economic institute said in a recent survey that German industry’s labor costs are the highest in the world, with 72 percent of 523 companies questioned saying they would hire more staff if the government made headway on lowering the burden. Labor costs — consisting of net pay, welfare insurance and benefits — totaled $23 per hour in Germany last year, compared with $22 in Japan, $20 in the U.S., $17 in the U.K. and $16 in France, the IW said.

According to news in this morning, German unemployment rose for a sixth successive month in July. Also all available evidence seems to suggest that the German ‘revival’ is export driven with internal consumption remaining largely flat. To this picture must now be added the reality that what expanison there is in Europe’s largest economy has so far failed to prompt executives to hire more staff.

So what’s with the Elga Bartsch thing?

Well first of all, take a look at what she was saying last week on Stephen Roach’s Morgan Stanley Global Forum:

Would you believe it? The deflationists are back! Just a year after the deflation debate in post-bubble America reached a climax, driving global bond yields to historical lows, some economists are warning of a new deflation threat being in the making on the Old Continent. Their concern is that the recent agreements reached in Germany, on extending working hours without compensation for the extra hours put in, would cause downward pressure on consumer prices (see German Economics: Reforms Reach the Grass-Roots, July 7, 2004, for more details on the trend toward company-specific deals on pay and working conditions). Hence, the ECB should consider cutting rates in response to these disinflationary, if not deflationary, work-time deals, to prevent inflation from easing towards the deflation danger-zone. We disagree, on four grounds.

Just one quibble, what gives with the deflationists are back stuff, how can people be back who have never really been away:)? Clearly ‘our Elga’ has difficulty getting to grips with the core of the deflation argument, which relates to Germany much more than it does to the US, and to changing global production patterns (the rise of the new Asian ‘tigers’) and to changing global demography much more than it does to the (Irving Fisher style) problem of the debt impact of the burst bubble. Still Elga is far from alone here, so perhaps this is unfairly harsh.

However her arguments about why the impact of the changing work contracts in Germany (and later elsewhere) won’t have a disinflationary/deflationary (take your pick) impact are really pretty outrageous. Essentially she argues two things: that the workers affected are too few to have any impact, and secondly, that the workers affected, not having lost any earnings, should not show any changes in their consumption patterns.

The first of these arguments flies in the face of what Elga herself (and others who advance the same view) have been saying, and the second ignores one key component of economic behaviour: psychology.

In my view, the most promising avenue to improve cost-competitiveness though is through greater flexibility with regard to working hours by either raising the average workweek or cutting holiday allowances. For starters, such flexible arrangements allow companies to react to demand fluctuations without incurring hiring and firing costs. In addition, raising the number of hours worked without fully compensating staff for the additional effort, is a great way to boost cost-competitiveness in the face of a rising euro and EU enlargement. It seems that workers find it easier to put in the extra hours than to accept a pay cut.

I argue that instead of a continuous stream of reform proposals, Germany would need a big bang to restore confidence. In my view, further streamlining of the welfare state is essential to reduce non-wage labour costs. So is further labour market liberalization.

Put bluntly: what Germany needs is a reduction in labour costs and reduction in social welfare expenditure.

Her colleague at Morgan Stanley Eric Chaney elaborates on this further:

There is already a two-speed Europe. Since the first quarter of 1999, peak of the previous business cycle, final domestic demand has increased by 0.3% in Germany, versus 11.2% in the rest of the euro zone. Zero growth in Germany, 2.2% per year on average in the rest of Europe, these numbers speak for themselves. It is not the place to embark in a detailed analysis of this divergence. My colleague Elga Bartsch has written extensively on this issue and, I believe, spotted the main causes of the German disease: excessive wages and wage costs, a counter-productive ?wage cartel?, and a hypertrophied welfare state that is both a burden on companies and workers and a disincentive to work.

One single factor explains this divergence: in the five years that followed the unification, German wages were up 35%, vs. only 15% in France. Since then, German companies have partially restored their competitiveness by substituting massively capital to labor and offshoring production centers to Eastern Europe and now China. However, for the domestic economy, this was done at the expense of capital productivity, which is now so low that the return on capital has become one of the lowest in Europe. Permanent job cuts and, now, capex cuts are just symptoms of the German disease. The root is elsewhere; it is in a wage bargaining system that has fuelled a wage bubble and, then, prevented its correction.

Now it may well be true that Germany has no alternative to this ‘remedy’. My argument is simply that this will undoubtedly be deflationary in it’s impact, and will more than likely only be a palliative, helping things get worse less quickly.

Elga’s suggestion that only relatively few companies are affected is tendentious to say the least: her argument ought rather to be that this is insufficient, and should be spread throughout the German economy. But if the trend is generalised, then the impact surely then will be deflationary. And this for the very good reason that the psychology of the situation will mean that people do feel that their living standard has fallen. They will not feel so affluent, and this feeling is bound to hit consumption negatively. Call it a ‘wealth effect’ if you like.

Also to argue that this is not deflationay since the impact of closing the plants altogether and losing all the jobs would have been more so is simply silly.

The German economy is export driven, there is no escaping this fact. The world economy (and in particular the US and China) seems to be slowing down. This will be felt in Europe. So if your external demand is reducing, and your internal demand is about to take another hit, I don’t see how people can fail to draw the conclusions. Just because there are no easy solutions is no reason to fail to face up to reality. Advocating an exit strategy, but then running away from the conclusions doesn’t seem to me to be the best way of doing things. Of course in referring to ‘our Elga’ here there is nothing personal, she is simply a representative – possibly a rather overquoted one – of a current of thinking. It is the current of thinking which I think is flawed.

This entry was posted in A Fistful Of Euros, Economics and demography by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

23 thoughts on “Who is Elga Bartsch?

  1. The case against falling spending is perhaps smaller than you claim here. While the equal-wage more-hours employees will presumably feel less wealthy, it’s just as plausible that they will comfort themselves with increased consumption and/or spend more money on timesaving products and services to make up for their lost leisure time…

  2. “it’s just as plausible that they will comfort themselves with increased consumption and/or spend more money on timesaving products and services to make up for their lost leisure time…”

    John, this is the old negative elasticity argument. You can’t afford caviar, so you buy more bread and potatoes. Sure. And people will drink more beer, smoke more cigarettes and take more Prozac.

    But really we are taking about driving a sophistocated technological information economy here. This is old 1930’s deflation economics, dressed up in 2000 language. It didn’t work then, and I doubt it will work now.

    The problem was that back then the demographics were different. Classic Keynesianism was possible since there were bigger generations to come to pay back the debt. We are not there now. History has moved on.

    I’m not suggesting that there will be any sort of cataclysmic decline in consumption (unless bigger things crack elsewhere that is) but just that we need to be clearer about the cumulative weight of a constant steady attrition in everything.

    The other road would be one of reducing unit labour costs by a productivity driven transformation. But with an ageing and demoralised workforce, working longer hours for the same money and less pensions, it is hard to see where the motivation would come from for this. The ‘animal spirits’ would seem to be lacking. Something is unwinding.

  3. I’ve been having some of the same questions about the prescribed “screw labour” remedies for the European economy. When the problem is inadequate demand, you don’t solve the problem by producing more while putting less money in consumers’ pockets. Even if the German economy is primarily export driven, producing more goods at a lower cost without putting any more cash into the pockets of actual German citizens seems like a very self-defeating economic strategy. And what does reducing vacations have to do with labour flexibility? The cost of hiring and firing on demand has little to with hours worked or vacations. If German employers were demanding a reform of their payroll taxes so that they paid more proportionate taxes on worker’s pay I might understand, but when they associate flexibility with more work for less pay, I have to assume that “flexibility” is a mistranslation of whatever German word they’re using.

    As for anemic German and Japanese growth, again, these are both nations with very low population growth rates and rapid aging. If the number of workers doesn’t grow and the number of consumers doesn’t grow and the amount they spend doesn’t grow because they’re all trying to store their cash for their retirement, it’s hard for me to come to the conclusion that Germany and Japan really have a growth problem. They certainly have an unrealistic expectations problem about the effects of low population growth and aging, but that’s something else. I submit that a labour-driven “solution” to Germany’s economic problems will not dramatically reduce the gap in growth in incomes per capita if the same assumptions about demographics remain.

  4. The trend in public opinion in Germany goes toward “work more for the SAME money”.
    I don’t see, why this policy would produce any deflation.
    The individual German worker still gets the same salary, after all.
    True, he has less leisure time. Maybe he will have less time to spend vacations abroad. But he still has the same amount of money to spend in, for instance, German shops.

  5. Florian’s point is basically the same one I was getting at – I’m not trying to make a silly voodoo economics “people will spend more ? on cheap food than they used to spend on expensive food” argument, rather it’s that people on the same income but with less leisure tend to increase their spending to compensate for the lack of leisure – in the way that people who work long hours buy expensive goods as treats for themselves.

    Whether this will improve overall economic welfare is another question… indeed, perhaps it would be better if these jobs were outsourced to eastern Europe and German labour was freed to work on something more productive (I know it’s a counterintuitive view, but it’s worked consistently in practice ever since the Agricultural Revolution).

  6. This assumes that leisure time is spend unproductive which is simply not the case. Buying Ikea furniture and assembling it yourself may not show up in the GDP numbers but it does make you wealthier.

  7. Put bluntly: what Germany needs is a reduction in labour costs and reduction in social welfare expenditure.

    Horsepuckey.

    In fact the Cologne-based IW economic institute said in a recent survey that German industry?s labor costs are the highest in the world, […] Labor costs — consisting of net pay, welfare insurance and benefits — totaled $23 per hour in Germany last year, compared with $22 in Japan, $20 in the U.S., $17 in the U.K. and $16 in France, the IW said..

    Country, Labor Costs, Unemployment rate
    DE: $23/hr 9.7%
    JP: $22/hr 5.3%
    US: $20/hr 6.3%
    UK: $17/hr 5.0%
    FR: $16/hr 9.6%

    I dunno about you folks, but I’m not seeing a relationship between high labor costs and high unemployment.

  8. Patrick; “I’m not seeing a relationship between high labor costs and high unemployment”

    Who supposed that unemployment was boosted only by relatively high labour costs or just by high labour costs and welfare benefits?

    From internationally available data, such as the US Bureau of Labor Statistics, it has been evident for years that employment costs in Germany, especially in the relatively large manufacturing sector, were significantly higher than in its main trading partners.

    The question was and is whether relative productivity in Germany’s business sector was sufficiently high on average to compensate for the high employment costs or, alternatively, whether German companies produced sufficiently differentiated products for international markets to enable the companies to cover the higher employment costs while remaining competitive. After all, Germany has a goodly suplus on its balance of trade as well as a surplus on its current account, hardly symptoms of failing international competitiveness.

  9. “I don’t see, why this policy would produce any deflation.

    The individual German worker still gets the same salary, after all.”

    I think my main point here is the psychological one. The way the individual concerned feels, and sees the future.

    The OECD economies which are getting growth are credit driven Assuming credit responsibilities means you have a certain level of confidence in the future. Whether this confidence is justified is another question.

    The US is a clear example at present of this. So are the two EU economies with a different growth profile, Spain and the UK.Of course all this has well known problems of sustainabilty.

    But essentially if you feel confident about the future you are prepared to borrow. Normally there are reflections of this in the housing market.

    Other EU economies have a different feel. The individual feels insecure about the future, has less appetite for risk, and is less willing to borrow. Italy and Germany are clear examples of this process at work.

    A non-EU OECD economy where you can also see this is South Korea, where the confidence index has just come in at its lowest level in 4 years. Unsurprisingly S Korea is also a society where there are important ageing processes at work.

    http://news.ft.com/cms/s/4ff25a5a-e698-11d8-bef3-00000e2511c8.html

    The cenral point is that the German worker can see no real light at the end of the tunnel, only deterioration. This is the big problem.

    Another issue no-one is touching on is that of overtime payments. I don’t know enough about German industry to say just how many of the hours being incorporated in the basic week will previously have been used for leisure, and how many will have been used for paid overtime, but I suspect that this phenomenon is present.

  10. “it would be better if these jobs were outsourced to eastern Europe and German labour was freed to work on something more productive”

    This John is undoubtedly true. But here the EU and the US (with it’s ‘weak’ labour market) are in pretty much the same boat. There is little evidence that the work that is being displaced is being re-directed towards higher value activities in anything like sufficient quantities.

    Indeed this paper:

    http://www.imf.org/external/pubs/cat/longres.cfm?sk=17591.0

    published on euro area policies by the IMF on Tuesday seems to suggest that the only consequence in the short-term of increased labour flexibility in the Euro zone has been a substitution of labour for capital, as labour has become relatively cheaper. This means effectively that people are moving down-, and not up-market in terms of work.

    We were promised (by among others the economist) that everything in the OECD world would be OK, that a new ‘new’ sector would emerge where our societies could move on to another value level. We are still waiting.

    Meantime what Stephen Roach calls global labour arbitrage means that even relatively higher value work is now being redistributed across the planet. In economic welfare and social justice terms this is undoubtedly to be welcomed. But it does leave the ‘old incumbents’ with something of a problem.

    My feeling is that we are still in a state of ‘denial’ on all this.

  11. The problem in America is the weakening of labor and the favoring of capital. Labor in America has lost the battle. I hope that the EU sticks to its guns regarding labor. It may be rough for awhile, but a government that supports the people as opposed to big business will always come right in the end.

    In America, we have government by the corporations and for the corporations. Letting Morgan (remember J.P.?) control your labor market is stupid. We need another Teddy Roosevelt type that will keep capital under control.

  12. the deflationary fear is real, because of the demographic trend not the higher labor costs.
    A lower trend means Less and less new consumers and potential investors. You can still export the unsold goods( they do) but not the hard assets.
    Real estate is going to lose value, damping the little confidence of the remaining consumers.
    slashing cost can give a medium term kick to the economy but the trend will catch up.
    Take the case of the US. Without the massive imigration from the last 15years, GDP growth and productivity would have been on a european level.

  13. As a follow up.
    We should open a thread on “The Impact of demography in the next 20 years”

    This is history, we never faced such a trend.

  14. IIRC 18 century England had also a decline in population which wasn’t due to decease or famine. So i don’t think this is the first time this happens. You could argue that there are now more old people but i don’t know if this increase the number of people who are “handicaped”

  15. Interesting. What do you know about this period.
    Old people spend much less.
    The max cconsumption is between 30-40. Kids, new home, cars. then it is only replacement (= no growth).

  16. “IIRC 18 century England had also a decline in population which wasn’t due to decease or famine.”

    This is an interesting point, people normally go back to the black death here.

    If I am not mistaken the change you refer to was produced by an increase in the average age at first birth. At the time of course England had a lacklustre and pretty uninteresting economy. Then in the late 18th century age at first birth came down again, for reasons which have never been properly explained. This produced a population explosion in the Uk, which later came to be referered to as stage one of the demographic transition.

    It also lead, among other things to the industrial revolution and rise of Britain as a world economic power.

    The picture today is one of a sustained and continuing rise in age at first birth, demographers speculate that this has still some decades to run. Consequence: declining birth rates and pyramid inversion. Unlike the 18th century, there is no reason to imagine that things may revert.

  17. “The problem in America is the weakening of labor and the favoring of capital.”

    Sorry Lynne, I’d like to believe you, but I think that this time it is more complex. Mind you, you are in good company, Paul Krugman is probably the best known exponent of this view.

    I think the US is at a historic crossroads, somewhat similar to the UK in 1918.

    Exiting the Iraq war looks to be extremely comlicated, and a US with the diminished global authority a ‘botched’ exit will produce will probably lead to a more unstable world and leave a high water mark in the evolution of the US itself.

    New economies, and new global powers are coming. China and India being only the most obvious of these. Clearly the process is only begining, but it is begining.

    The problem for the US is to maintain the value of its economic activity in this period of global re-alignment. The outsourcing debate is only the start of this.

    Essentially the US economy is one enormous job-churn machine. The real problem is if the net worth of those jobs entering one end is not equal to that of those exiting the other. I see nothing in the approach of either candidate for the forthcoming elections which is going to seriously address this problem.

    Bottom line: the US is living in denial just as much as the EU.

  18. Highly interesting stuff.
    Today a Dutch judge ruled against an arrangement of working more hours for the same money. (because it conflicts with the prevailing collective labour agreement).
    I do not really know what to think of it.
    I agree with Edward on the denial in the US and Europe but there is also a (too) strong “screw labour” part.
    Another company planning the same arrangement (working more hours with same salary) calculated that in this way they could cut down the costs per product from (some) € 26 to 22 per unit. The alternative would be outsourcing to an east-European country where these costs are only € 8 !
    Strange.
    In the meantime the company apparently assessed that with a little bit lower price they could find a market. Lacking demand? Deficits recommanded?

  19. Age of first born is highly cultural dependand and so could change quite unexpected. It did in 18th century Europe.

  20. Frans
    OK, you cut product cost from 22 to 18 if But when demographic trend is defavorable there is no incremetal demand,so who is going to buy the product.

    Age of first born is an old phenomena in Europe and all over the world. The impact is already behind us.
    What is really hurting is lower replacement rate. To add insult to injury, the economy has benefited from increase life expectancy for the past decades. when this phenomena ends with the death of baby boomers the size of Western countries’ population wll drop as a stone.

  21. The impact is not behind us. There is no reason to asume that the age of first born will not rise

  22. “There is no reason to asume that the age of first born will not rise”

    If you mean the age at which women have their first child, you are right, it will continue to rise. It is likely that the structural reforms and the intended increase in participation rates (if we ever get them) will only instensify this.

    The real point is that in the forseeable future there is no reason to expect a fall.

    The falling replacement rate is a product of two interrelated processes:

    1/. A real decline in the number of children each woman has.

    2/. A statistical phenomenon produced by the fact that women have children later, and later..

    This shows up as declining fertility, and the effect on cohorts and the age pyramid is real enough.

    It is the statistical impact of this second process which tends to give the impression that fertility fluctuates more than it really does (this and the impact of immigration with a higher proportion than typical of women of child bearing age). This tends to produce the response “look things are improving” when what is really at work is a statistical blip.

    To avoid the consequences of the reality that fertility is on a long term decline in both the OECD and most of the developing world (in terms of real children per real female) most of us engage in some sort of demographic “panglossism”: everything will be for the best in the best of all possible worlds.

    ie, we assume that things will get better, we don’t really know why, we just assume it will :).

    It would however be interesting to get some explanation for this, just once in a while.

  23. “but there is also a (too) strong “screw labour” part.”

    I agree, labour costs are becoming the scapegoat (which doesn’t mean unit costs aren’t too high).

    What I am trying to say is that behind the veneer, what is being recommended is some version of the old 1930’s deflationary package argument, dressed up as saying that this ‘modern’ way it will be painless.

    It is this argument I don’t buy. It didn’t work then, and it won’t work now. What we need are new ideas, but we seem to be fresh out of those.

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